TNAG-1059-FCO40-1309-Guangdong-nuclear-power-station-project-1981 — Page 19

Treasury Chambers

Parliament Street London SW1P 3AG

Telex 262405

Telephone Direct Line 01-233 5183

GTN 233

Switchboard 01-233 3000

R&R p".

CGE 18/11

A Havelock Esq

Department of Industry

MEE Division Ashdown House

123 Victoria Street

London SW1E 6RB

Your reference

Our reference

Date

17 November 1981

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16611

• P NOU T921

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GUANGDONG

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ND

18/4

It was agreed at Gordon Manzie's meeting on 9 November that we should let you have comments on the draft submission on the financial aspects of the Guangdong project. The meeting decided that submission now to Ministers on this project would be premature but that the draft, which would be kept on ice until needed, should be recast on the basis that the interest rate to be charged would be the new Consensus rate of 10% rather than the old, subject to the possibility of going below this to match competitive offers should the need arise.

2. Our only other points concern the maximum acceptable level of subsidy on this project. We would expect the increase in the Consensus interest rate to be fully reflected in a reduction in the subsidy element. One of the prime objects of the increase in interest rates was to reduce the cost of these export subsidies and these gains would be lost if the amount saved were offset by other concessions.

3. It seems to us that on the basis of an interest rate of 10%, a maximum subsidy of about 42%, rather than 44% would represent the equivalent of the 50% proposed originally. However, as I explained in my letter of 3 November, I regarded the 50% subsidy proposed on the basis of interest at 72% as excessive, since it was only 2 percentage points less than the subsidy granted recently on the Sicartsa Plate Mill complex in Mexico which also included aid. No aid is to be offered to China and therefore one would look for a significantly lower level of subsidy on the Guangdong project than on the Mexican one, after taking into account the full effects of the change in the level of interest rates. On this basis, I would argue that the maximum subsidy for Guangdong should be lower than 42%.

I am not sure that we should rule out as easily as the draft submission does, the suggestion that a higher rate of interest should be charged for longer term loan or for the capitalisation of pre-commissioning interest. The Americans might well require a higher rate of interest for a longer period and it is by no means unreasonable to expect the customer to pay something extra for the ability to bring his repayment obligations more nearly into line with the benefits that will accrue to him when the power station is in production. Furthermore, acceptance of such higher interest rates might permit greater flexibility in meeting the customer's requirements without extra cost to us.

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